The uncontroverted evidence supports the district court’s conclusion that this was a sham conduit transaction, and that Midcoast is not entitled to claim a stepped-up basis for the assets it purchased. Langley sought to sell his stock in Bishop, knowing that a direct asset sale would have negative tax consequences for him. As Midcoast concedes, Bishop’s assets had appreciated considerably and the corporation would have to pay significant taxes on those gains, and Langley in turn would have to pay taxes on distributions he took as a shareholder from Bishop.

Midcoast was one of many interested buyers and submitted a bid of $157 million for the stock, which it subsequently increased to $184.2 million, but then -- upon further reflection -- lowered to $163 million. Langley found this offer unacceptable.

When Langley rejected Midcoast’s reduced offer, Midcoast asked its tax advisor, PWC, for suggestions about improving its bid. PWC suggested that the parties use a third-party intermediary for the transaction and suggested Fortrend, a corporation that has done a number of conduit transactions. PWC then brought Fortrend into the fold. The evidence shows that this was done to “bridge the gap” in the transaction -- referring to the agreed dispute over the sale price. Midcoast understood that Fortrend would buy Langley’s stock and then sell the Bishop assets to Midcoast.

Fortrend, rather than buying the stock and selling the assets itself, formed a special vehicle solely for this purpose: K-Pipe. K-Pipe existed for no other purpose than to accomplish this transaction, and did no substantive business before or after it finished the transaction here. Although K-Pipe obtained financing for its purchase of Langley’s stock, that financing was wholly secured by Midcoast’s funds equal to the loan deposited in escrow accounts. Thus, while technically a loan, it was effectively no different than purchasing the stock with Midcoast’s funds. That financing was obtained through a foreign bank known to finance these types of midco transactions. K-Pipe did not exist prior to the transaction’s occurrence; it was created solely to buy the stock and sell the Bishop assets. The evidence shows that Langley and Midcoast were discussing the purchase prior to K-Pipe’s involvement, that they met together -- along with PWC -- to discuss the deal, and that the sell/buy transactions occurred within 24 hours. This evidence supports only the inference that K-Pipe was merely an intermediary without a bona fide role in the transaction.

Indeed, Midcoast concedes that “Midcoast wanted to acquire the Bishop pipeline assets. But the only way Midcoast could acquire the Bishop assets at a price Midcoast was willing to pay was if a third party (K-Pipe) acquired Bishop’s stock from Langley and then sold the assets to Midcoast.” Midcoast articulates only three purported business reasons why it used a conduit transaction rather than a direct asset purchase. First, Midcoast states that KPipe sought to earn a “profit.” But this does not answer the question of why any party was willing to pay K-Pipe to be an intermediary. Moreover, as our case law shows, the mere payment of a fee or profit by the intermediary does not prevent finding that the transaction was a sham. Second, Midcoast states that it used the midco transaction form because it “wanted to acquire and operate the Bishop pipeline assets at a price it was willing and could afford to pay.” This is not a tax-independent business consideration; the money Midcoast saved by lessening its tax burden allowed it to pay more for the assets.

Midcoast further contends that this transaction limited its exposure to litigation because, had it purchased the Bishop stock, it would have been liable for claims against Bishop. By purchasing only the assets, Midcoast contends, it could avoid liability on known and unknown claims that might be asserted against the Bishop corporate entity. But this in no way explains why an intermediary was necessary: The parties could have achieved the same result had Midcoast bought the assets directly from Langley and Bishop without using an intermediary. ...

Accordingly, the uncontroverted facts support the district court’s determination that the IRS was entitled to disregard the form of the transaction and treat it as a direct sale of stock. Given that the transaction was designed solely for the purpose of avoiding taxes, and Midcoast has offered no adequate non-tax reasons for using a conduit entity, the district court did not err in finding the IRS appropriately disregarded the form of the transaction.